Make informed credit decisions by learning how a balance transfer differs from debt consolidation offers.

Being saddled with debt can impact many areas of your life. It can drag down your credit score, which makes it harder to secure a car or home loan. Then there’s the persistent dread every time bills arrive or the phone rings with an unknown number. It’s no wonder more and more people are researching tactics to get out of debt faster. One common question debtors ask is, “What’s the difference between a balance transfer and debt consolidation?”

The most simplistic explanation is that a balance transfer is a type of debt consolidation. Credit card balance transfers shift credit card debt from one or many cards to another with a lower interest rate. Debt consolidation in general refers to taking out one loan to pay off many others. You can use a debt consolidation program to tackle most types of debt not tied to an asset, but a balance transfer offer only applies to credit card debt.

Balance Transfer vs. Debt Consolidation

Which option is right for you? It depends on your particular situation, of course, but here are some common scenarios:

“I have $15,000 worth of credit card debt on a high APR card. I am trying to pay off the principle, but the amount of interest every month is making it nearly impossible.”

Solution: Balance transfer. If you are able to find a balance transfer offer with low fees and a 0% APR introductory rate you can use this grace period to really tackle paying down the principle, and assuming you have the available credit. However, be certain you know what the APR rises to after the introductory period.

“I have a student loan and four different credit cards with balances on them. I’m trying to pay everything off, but I can only cover three of the four cards a month and now I have late payments stacking up.”

Solution: Debt consolidation. A legitimate debt consolidation program should be able to consolidate each debt into one monthly payment. Depending on the program, they may be able to negotiate a lower monthly total as well. If there are any assets to secure a loan against (such as a house or car) the interest rate could be much lower than a credit card APR.

Which is Better for My Credit Score: Debt Consolidation or a Balance Transfer?

One option isn’t inherently better than the other for your credit score. It’s actually all about your credit utilization ratio, or amounts owed, which is your total debt compared to your total limits. This typically makes up 30% of a FICO® Credit Score.1 Adding another line of credit with a high limit can reduce your overall ratio and with a lower interest rate you can pay more toward the principle every month, lowering your debt in the long-term.

One thing to watch out for with balance transfers is unintentionally blasting your utilization ratio by cancelling cards once the debt is transferred. If the limit on the balance transfer card is $10,000 and you transfer $9,500 worth of debt, then cancel the old cards, your utilization rate will jump to 95%, which will likely have a negative impact on your credit score. Keep credit limits in mind when shopping for a balance transfer offer and avoid closing old accounts after consolidation. Length of credit typically contributes to 15 percent of your FICO® Credit Score.2 Instead hide your paid-off cards somewhere secure to maintain credit history without giving in to impulse purchases.

Finally, remember that both a balance transfer and a debt consolidation loan are considered new credit applications, which can impact your credit score in the short-term.

More About Balance Transfers

It’s important to do your homework when considering a balance transfer offer. Add up the total amount of debt you’re carrying on all cards, calculate how much you can pay toward the total debt during the low-APR window and then how much you will pay in interest after the rate reverts to a higher APR. Compare what you would pay at your current APR to the balance transfer opportunity. Don’t forget to add in any fees associated with the balance transfer before making a decision.

Balance Transfer


Pay Off Debt Faster with a Balance Transfer.

You may also be considering a balance transfer vs. a cash advance or a balance transfer vs. a personal loan. In each instance you should apply the same logic and do the math to find out what these financing options will cost in the long-term. If you do decide to move ahead with a balance transfer, remember the low APR only applies to the transferred debt. In most cases if you make new purchases on the card you will be charged the standard APR, which can be much higher.

More About Debt Consolidation

There are two main types of debt consolidation programs: secured and unsecured. A secured loan has an asset backing it, such as a home, vehicle or even a retirement fund. An unsecured loan is not tied to collateral, and since it’s more of a risk to the lender it typically has a higher interest rate than a secured loan (but still lower than most credit card APRs). There may be an exception if the borrower has a very high credit score.

A very common type of secured debt consolidation is a home equity loan. If there is a significant difference between your current home value and the mortgage balance you can borrow against that equity to receive a much lower rate than with an unsecured loan. An additional bonus is that in many cases interest paid on a home equity loan is tax deductible.

Finally it’s crucial to research every debt consolidation lender you consider working with as there has been a rash of fraud in this industry over the last decade.3 A reputable organization will send you everything you need to know about their services without you having to provide any detailed financial information. They will also be licensed to offer services in your state with accredited and certified counselors. Research credit counseling agencies with your state attorney general and local consumer protection agency before signing on the dotted line.

Whichever route you choose congratulations on taking important steps toward getting out of debt! If you would like to speak to an agent about a home equity loan, our team of experts at Discover would be happy to discuss your situation and provide options for living debt-free sooner.


Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries.

Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating.